Inherited IRA
I have a client that inherited an IRA from her Mother in 1999. She transfered the account to our firm in 2001. She has the account titled as “FBO Mary Client – Beneficiary” – it has just come to our attention that no RMDs have ever been taken from this account. What are our options now in 2007? I think it either should have all been distributed within 5 years or stretched over the remaining lifespan of her deceased mother. What are the penalties for this oversight?
Thanks for your help.
Permalink Submitted by Alan Spross on Sat, 2007-12-29 06:14
Did her mother pass prior to or after her RBD? Do you know what distributions might have been taken between mother’s death and when your firm acquired it?
Permalink Submitted by David J Chapman, CFP on Wed, 2008-01-02 23:06
My clients mother was 60 years old and had not taken any distributions.
she was a designated beneficiary but has not taken any distributions yet- can we just take the 8 years of RMDs this year and pay penalties for those years but leave the rest to grow in the inherited IRA and make sure we take yearly distributions?
Permalink Submitted by Alan Spross on Wed, 2008-01-02 23:29
Prior to 2002, the default rule for deaths prior to the RBD was the 5 year rule. When the default rule was changed to life expectancy in 2002 with the new RMD Regs, a beneficiary under the 5 year rules was given until 12/31/03 to change over to life expectancy by catching up prior year life expectancy distributions.
However, since this was not done, your client remained under the 5 year rule and now has excess accumulation. Her only option now is to completely distribute the account and request that the excess accumulation penalty be excused by the IRS per p 54 of Pub 590 (06 edition). Form 5329 is filed with the request. The IRS has been lenient in waiving the penalty in most cases.
However, this still leaves the downside of loss of tax deferral as well as a possibly large taxable distribution in a single year.
Permalink Submitted by David J Chapman, CFP on Thu, 2008-01-03 14:33
So if I understand your reply – there is no 50% penalty for not taking the RMD (full liquidation of account) within the 5 years? Is the only peanlty we are facing is the excess accumulation?
Permalink Submitted by Al Fry on Thu, 2008-01-03 16:34
The Excess Accumulation Penalty (also referred to as the Insufficient Distribution Penalty) IS the 50% Penalty.
Permalink Submitted by David J Chapman, CFP on Thu, 2008-01-03 16:40
Would that 50% penalty be applied just once (in the yearwe drained the IRA) or would it be applied for each year that it was not drained but should have been (ie 2004, 2005,2006,2007) This could make the penalty about double what the amount in the IRA value is. What years value dose the 50% penalty apply to – the year value it should have been withdrawn or the year value it is withdrawn?
Permalink Submitted by Wayne Sexton on Thu, 2008-01-03 20:39
Drain the IRA under the 5 year rule and request leniency on the excess accumulation rule (better known as the 50% excise tax) using IRS Form 5329